Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/23/2017

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Missing Catalyst

by Jim Brown

Click here to email Jim Brown

The market has lost its catalyst and cannot find its way.

Market Statistics

The Dow and S&P posted minor gains and the Nasdaq traded in negative territory several times before squeezing out a gain at the close. With earnings winding down and economic reports weak, there was nothing to energize the market. There were worries over the FOMC minutes on Wednesday and what the Fed might say about selling off the positions acquired in QE.

Without a catalyst, the markets were left to wander but at least they had a positive bias. The S&P tried to trade over 2,400 twice bout could not hold the gains. Volume was only 5.9 billion shares and the S&P traded in a narrow 4-point range after noon.


New Home Sales for April fell 11.4% from 642,000 to 569,000 and well below estimates for 619,000. Sales declined in all four regions. Sales fell -7.5% in the Northeast, -13.1% in the Midwest, -4.0% in the South and -26.3% in the West. The median home price fell from $316,300 to $306,200. Despite the decline in sales, the outlook is still strong. On 33% of homes sold the construction had not yet started, up from 28% in March. The percentage of sales for homes currently under construction was 35.9%. Completed homes accounted for 31.1% of sales.


The Richmond Fed Manufacturing Index for May fell off a cliff. The headline number declined from 20.0 to 1.0 and the first time in five months to be in single digits. New orders fell from 26 to zero. Order backlogs dropped from 4.0 to -15. The shipments component fell from +25 to -1. This suggests the post election optimism in manufacturing sector is crashing.

The separate services survey rose from 22 to 34 but that is more a function of warmer weather and more outdoor events than a sudden surge in business activity. A troubling component was shopper traffic that fell from 27 to 7 and expected demand fell from 96 to 73. Inventories fell from 24 to 1.



Wednesday we get existing home sales for April and they are expected to have declined.

The biggest problem for the week is the FOMC minutes. The Fed is widely expected to have discussed reducing their $4.5 trillion balance sheet. Depending on how they decide to do this it could be market negative. Currently, they are still replacing treasuries that have matured by acquiring new treasuries. This is keeping the supply of treasuries tight and interest rates low. If they elect to stop replacing the matured securities, it would still take many years for all their positions to mature and roll off the books. There are no conversations about actually selling treasuries back into the market. That could happen a couple years from now but not in the current plans.

The best thing for the market would be for the Fed to limit repurchases rather than halt entirely. Assuming there was $40 billion in maturities next quarter; they could limit repurchases to $20 billion and buy the shorter durations. That would begin to shorted the overall duration of the portfolio and allow for a faster roll off a couple years from now when the economy is expected to be stronger. Reducing their portfolio would have the desired effect of raising interest rates without actually announcing a rate hike. By allowing market supply to increase, it would increase rates very slightly.

After the FOMC minutes the market is likely to go dormant as volume crashes ahead of the holiday weekend. Volume is already under 6.0 billion shares and the lowest since April 17th and everyone is just waiting for the minutes so they can dress their positions and head for home.


In earnings news, AutoZone (AZO) reported earnings of $11.44 compared to estimates for $12.00. Revenue of $2.62 billion also missed estimates for $2.17 billion. Same store sales fell -0.8% and well below estimates for 2.7% growth. The company blamed the weak performance on the delay in tax refunds. However, the CEO said for whatever reason those refund dollars never seemed to show up. He also blamed the weak sales on the weather. That is always a convenient excuse. Shares were crushed for a -12% decline of $78.


Take-Two Interactive (TTWO) reported earnings of 83 cents compared to estimates for 59 cents. Revenue of $571.6 million easily beat estimates for $407 million. They guided for full year earnings of $4.25-$4.65 per share. On a negative note, they delayed the release of the highly anticipated western, "Red Dead Redemption 2" from fall 2017 to spring 2018. This is the first game built completely from the ground up to take advantage of the new class of gaming consoles. Their Rockstar development unit is known for being focused on perfection and this game is no exception.


Toll Brothers (TOL) reported earnings of 73 cents that rose 40% compared to estimates for 62 cents. Revenue of $1.36 billion beat estimates for $1.25 billion. They delivered 1,638 homes, up 22% in dollars and 26% in units. The average price was $832,400. They signed contracts for 2,511 units for $2.02 billion. Their current order backlog is 6,018 units and $5.0 billion. In the current quarter, they expect to deliver between 1,675-1,975 homes. Shares rallied at the open but faded into the close.


DSW Inc (DSW) reported earnings of 32 cents that missed estimates for 34 cents. Revenue of $691.1 million beat estimates for $685.3 million. Same store sales fell -3.0% but was slightly better than the expected -3.4% decline. They guided for the full year to earnings of $1.45-$1.55 and analysts were expecting $1.55. Shares fell 8% on the news.


After the bell, Intuit (INTU) reported earnings of $3.90 that beat estimates for $3.87. Revenue of $2.54 billion also beat estimates for $2.5 billion. They guided for revenue in the current quarter in the range of $795-$815 million and analysts were expecting $772 million. Full year guidance was $4.38-$4.40 and revenue of $5.13-$5.15 billion. Shares spiked from the $129 close to end the afterhours session at $141.


The highlights for the rest of the week are Hewlett Packard on Wednesday and Costco on Thursday. Best Buy and Lowes will also be watched.


Steel stocks spiked on expectations for the Commerce Dept to give some clues on steel import rules at a hearing on Wednesday. The department was supposed to determine if steel imports from China and elsewhere could pose a threat to national security through quality issues or because of U.S. capability shrinking due to the reliance on imports. The initial report claimed 26% of steel imports came in at unfair prices because of subsidies.


Bunge (BG) shares spiked 18% after an article in the WSJ claimed that Glencore approached the company about a takeover. After the close, Bunge issued a statement saying it was not involved in business combination discussions with Glencore and will continue to execute its own global agri-foods strategy.


After the bell the API reported crude inventories declined -1.5 million barrels last week but that was less than the expectations for a 2.3 million barrel decline. Gasoline inventories fell by -3.15 million barrels. Distillate inventories fell -1.85 million barrels.

Prices were up in the regular session after the Kuwait oil minister said OPEC was considering even deeper cuts when they meet on Thursday. Kuwait has already said they would support the Saudi Arabian - Russian agreement to extend cuts through March 2018. "All indications so far show that most countries, if not all, back the extension of this agreement." The minister also said four other non-OPEC countries, Egypt, Norway, Turkmenistan and Indonesia, could join the production cut. Shortly thereafter, Norway's energy ministry said it had no plans to reduce output. Prices rose to $51.50 in the regular session.


Markets

The markets traded in a daze after the noon high. Everyone is waiting for the FOMC minutes and hoping they will say nothing that will upset the market. If the minutes are tame, trading will come to an immediate halt and volume will die for the rest of the week. Without a catalyst, this market is going nowhere.

There is a slight upside bias but it is very slight and resistance is strong. The S&P tried to trade over 2,400 intraday but both attempts were immediately rebuffed.

The resistance is strong and without a catalyst, I would be surprised to see a major breakout. The post earnings depression phase is in full swing and the market is being lifted by an ever-shrinking number of big cap stocks.

The percentage of S&P stocks with a buy signal has fallen to 68.4% and the low for 2017.



The Dow gained 43 points and it was thanks to three stocks. Goldman, Caterpillar and JP Morgan. The rest of the components were evenly matched. Yesterday it was Boeing, 3M and Unitedhealth and BA/MMM were at the bottom of the losers list today. Fame is fleeting.

The index eased over the 20,900 resistance level thanks mostly to Goldman and the opening gap higher. The index is now facing much stronger resistance at 21,000. Since volume is a weapon of the bulls and volume is expected to be light the rest of the week, I would not be surprised to see that 21,000 level hold until next week.



The Nasdaq traded in negative territory multiple times throughout the day. With the exception of Google the FAANG stocks were absent from the winners list below. Amazon was only fractionally positive and Apple and Facebook were negative.

The Nasdaq is nearing its recent highs and there are probably some sellers waiting at the 6,150 level. The lack of excitement is evident and that should be with us the rest of the week.



The small caps are limping along but this was the fourth consecutive day of gains. The Russell has a long way to go to return to the pre crash resistance at 1,400.


The biotech sector is uncharacteristically calm ahead of the big ASCO conference next week. Typically, companies presenting at the conference are seeing their stocks rise. The weak biotech sector is holding back the Nasdaq and the Russell.


Why buy? Investors are probably asking themselves that question this week. Without any catalyst and with only a minor upside bias, there is no reason to rush into the market. The dip last week was a buying opportunity but hedge funds are not chasing stocks higher. Those stocks that did rebound sharply have now begun to fade.

Facebook is an example. The stock declined $5, rebounded $5 then resumed its original trend with a slightly negative bias. I scanned my entire watch list of 850 stocks and there were hundreds where the previously bullish charts were rolling over with post earnings depression. There is no reason to rush into the market this week. I would wait until after the holiday and see if traders come back refreshed.


Enter passively, exit aggressively!

Jim Brown

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New Plays

Volume Drying Up

by Jim Brown

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Editor's Note

This is a holiday week and the exodus of traders will begin at 2:15 on Wednesday. Volume will be very low for the rest of the week and there is no catalyst to produce a market move. Futures are negative and declining and even if they do turn around the market is likely to be flat the rest of the week. With earnings over there is a greater potential for a negative headline over the next three days than a positive headline that pushes the indexes through resistance. No new plays today.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

No Excitement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets posted a minor gain but there was no excitement to push them higher. With the FOMC minutes on Wednesday, earnings slowing significantly and a holiday weekend ahead, traders were lacking conviction for either direction.

All the indexes posted minor gains and the Nasdaq traded in negative territory several times. We may be reaching a point where investors are losing enthusiasm for being permanently long.





Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


UCTT - Ultra Clean
The long position was entered at the open.

HZNP - Horizon Pharma
The long position was closed at the open.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

BBRY - Blackberry - Company Profile

Comments:

No specific news. Shares holding at the 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

Update 5/22/17: BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.



HZNP - Horizon Pharma - Company Profile

Comments:

Horizon announced after the close they had sold the European marketing rights to Procysbi and Quinsair. We closed the position at the open.

Original Trade Description: May 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Horizon reported earnings of 21 cents that missed estimates for 25 cents. Revenue of $220.9 million rose 8% but missed estimates for $253 million. They guided for full year revenue of $1.0 to $1.035 billion, down from $1.26 billion. Analysts were expecting $1.4 billion. Shares were crushed for a 39% drop from $15.50 to $9.50.

Earnings July 31st.

However, the company said the declines in earnings and revenue were due to a change in business practices and how they contract with pharmacy benefit managers. To combat this change the company is changing its cost and pricing structure to better match the new contract requirements.

Secondly, they said they were expsnding investments in the drug Krystexxa and they raised sales expectations from $250 million to $400 million for the full year. They also signed a deal to acquire River Vision and its Thyroid Eye Disease drug for $146 million and the acquisition will close immediately. They also received approval from a supplemental New Drug Application (NDA) for Ravicti, a drug for urea cycle disorders in children.

Horizon has a portfolio of orphan drugs with more on the way. The shares were hammered but they are already rebounding strongly on what some investors are seeing as a buying opportunity.

Position 5/16/17:

Closed 5/23/17: Long HZNP shares @ $10.75, exit $10.39, -.36 loss.

Alternate:
Closed 5/23/17: Long June $11 call @ 55 cents, exit .30, -.25 loss.



IWM - Russell 2000 ETF - ETF Profile

Comments:

Markets posted minor gains but at least they were gains.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Position 5/18/17:

Long IWM July $138 call @ $2.00, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Minor decline but holding over support.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.



TWLO - Twilio Inc - ETF Profile

Comments:

No specific news. Canaccord said get over this "crisis of confidence around Uber." Nothing has changed. The two-day Twilio SIGNAL developers conference begins tomorrow and that could lift the stock.

Original Trade Description: May 20th.

Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Twilio Inc. was founded in 2008 and is headquartered San Francisco, California. Company description from FinViz.com.

Twilio has a messaging application that is built in to dozens of apps you probably use every day. When tech startups try to decide how to engineer a solution they normally find that imbedding Twilio messaging is much simpler in the beginning. The thought process is that once the company is running and profitable they will go back and build their own platform. For most businesses that never happens and they end up paying for Twilio forever.

When they reported earnings on May 3rd, they said revenue growth would slow because Uber was finally taking that step of engineering their own messaging platform and would be phasing out Twilio. When a company reaches the size of Uber they can afford to build their own interface. Only a few companies ever make the switch. Other major customers on their network with no plans to change are Nordstrom, Airbnb, Amazon, Facebook, WhatsApp to name a few.

Uber accounts for 12% of Twilio revenue so the exit is painful. Pacific Crest downgraded the stock saying they had underestimated the risk from Uber. JP Morgan reiterated its overweight rating and $36 price target saying Twilio would continue riding Amazon's coattails to success with Amazon Web Services. Their price target is $33.

Shares fell after Twilio guided for an adjusted loss of 10-11 cents on revenue of $86.5 million. Analysts were expecting 8 cents and $87.8 million.

Last week CEO Jeff Lawson bought 100,000 shares at an average price of $23.43 ($2.34 million). Board member Jim McGeever, VP of Oracle's Netsuite unit, bought 10,000 shares at $23.19. They do not appear to be worried about the business slowing.

Earnings August 1st.

Shares are ticking higher and closed at a three week high on Friday.

Position 5/22/17:

Long TWLO shares @ $25.01, see portfolio graphic for stop loss.

Alternate: Long July $28 call @ $.75, see portfolio graphic for stop loss.



UCTT - Ultra Clean Holdings - ETF Profile

Comments:

No specific news. Shares declined only 6 cents.

Original Trade Description: May 22nd.

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

The company reported earnings of 47 cents that beat estimates for 42 cents. Revenue of $204.6 million also beat estimates for $192.1 million. They guided higher for the current quarter to earnings of 49 to 55 cents and revenue of $210 to $220 million.

Earnings July 26th.

The company said it was seeing "extraordinary demand" and they were ramping up production to meet this demand.

Shares had been moving up steadily and I wanted to add them as a play multiple times but kept waiting for a pullback. That happened last week with a 10% decline and now they are surging again. Any further gain from Monday's close will be a new high.

Poaition 5/23/17:

Long UCTT shares @ $22.60, see portfolio graphic for stop loss.

Alternate position:

Long July $25 call @ .59, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Profile

Comments:

Minor gain to a new 4-week high. OPEC meets on Thursday.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.



WLL - Whiting Petroleum - Company Profile

Comments:

No specific news. Still fighting resistance at $9.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Alternate: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

ERA - Era Group - Company Profile

Comments:

No specific news. Only a minor rebound from the 6-month low.

Original Trade Description: May 8th.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



VXX - Volatility Index Futures - ETF Description

Comments:

No material movement because of the choppy market.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





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